Please find below a glossary of the most common terms used for binary options trading. We will try to update this glossary with any new widely spread term in the industry. Don’t hesitate to comment below if you want us to add or detail on of the below definition.
Asset or Underlying Asset or Underlying
The term underlying asset refers to the type of financial instrument that you are speculating on via the binary option. It is the financial instrument from which the price of your option is derived. This is why binary and traditional options are called derivatives. There exist four main asset classes: equity stocks, bonds or fixed income, commodities and indices. Examples of underlying assets for binary options include: USDGBP, USDEUR, Gold, Oil, FTSE-100, Dow Jones, Google, Barclays…
At The Money
This corresponds to the conditions where the underlying asset of your option is at or around the same level as when you open the trade (the strike level).
The term bearish is used to describe a financial market or market scenario in which prices are generally going down. If you believe that the price of an asset will decrease in the future, you have a bearish view on this asset. This is the opposite from a bullish view when you believe that the price of an asset will increase in the future
Binary options, also known as digital options, or all-or-nothing options, are contracts that have only two possible outcomes – either they win, or they lose. A binary option involves a fixed payout after the underlying asset meets or exceeds its predetermined threshold or strike price. Values of binary options payouts are determined at the start of the contract and aren’t affected by the magnitude of movement of the underlying asset price.
Boundary or Range binary options
Boundary or Range binary options allow a trader to decide whether the price of an underlying asset will be inside or outside a specified range when the option expires.
A broker is a financial intermediary that accepts to take the opposite side of a trader’s position (via hedging or replication of this position on the market or sourcing of a client that wants to trade the opposite side). Each broker has a different set of available underlying assets, available binary option types, available binary option maturities… For more details, don’t hesitate to have a look at our detailed reviews of OptionTime, 24Option, AnyOption and TopOption.
The term bullish is used to describe a financial market or market scenario in which prices are generally going up. If you believe that the price of an asset will increase in the future, you have a bullish view on this asset. This is the opposite from a bearish view when you believe that the price of an asset will decrease in the future.
A call is the common term for traditional vanilla option that entitles the buyer of the option to buy the underlying asset at the expiry of the contract. In the binary option universe, call also often refers to High binary options.
Commodities represent one of the main underlying asset classes. A commodity is usually a physical item or raw material like Gold, Oil, Wheat and Cotton. Commodities are ether traded physically or through future contracts on commodity exchanges. Commodity binary options (mostly binary options on oil or binary options on gold) are almost available at each of our recommended brokers.
A currency is an asset type that can be traded. Currencies are traded in pairs also called forex (for foreign exchange) and common examples of currency pairs are: USDGBP, USDEUR, EURCHF…
Current Price or Market Price or Live Price or Spot Price
This is the current price of the underlying asset which is reported in “real time” without delay typically by a data provider. Real-time market data are expensive and only the best brokers are able to provide live prices on a large range of underlying assets.
In order to start trading you need to add funds to your trading account. This adding of funds is called a deposit. Different brokers offer varying minimum deposits anywhere from $200 up to around $500. Most of the time, the broker will offer you a welcome bonus based on the value of your initial deposit.
The Early closure is a trading functionality offered by multiple brokers. The Early closure functionality allows you to sell your binary option before expiry. Most of the time, an early closure will reduce the payout that was determined at the opening of the position.
This refers to the time and date at which the option you have purchased will expire. When the option has expired it becomes void and ceases to trade. With binary options, expiry times are shorter than traditional investments and are generally comprised between 30 seconds and one week.
High / Low Binary options
High / Low binary options are the most common and simple types of binary options. They are also often referred as Call and Put binary options. For more information, please check our dedicated article on High / Low binary options.
This term is an option on a Boundary/Range Instrument and refers to when the underlying asset expires inside the higher and lower limits of the target price range.
An Index is a financial instrument that most commonly is an arithmetic average of different assets of the same asset class in order to give investors a quick overview of the evolution of a market. The most followed indices are equity indices. They can be based on a geographic area (FTSE100, S&P500…) or on a Sector (EUROSTOXX Banks Index, S&P500 Energy Sector…).
Instrument (Financial Instrument)
Often referred to as financial instruments or assets, it is another term which refers to the underlying Stocks, Commodities, Currency Pairs or Indices.
In The Money
This corresponds to the conditions where your option is generating a profit. It then corresponds to the conditions where the underlying asset price is above the strike level for a Call or High option, and the conditions where the underlying asset price is below the strike level for a Put or Low option.
Investment Amount or minimum Trade Ticket
This is the amount of money that is invested when purchasing an option. Typical investment amounts can range from $5 up to $10’000. The minimum and maximum investment amounts vary among brokers. A low minimum investment amount represents a real advantage for beginners as it allows them to trade without risking too much money.
This is an option on a One Touch instrument. It refers to when the price of an asset does not reach the target price during the lifetime of the option. If at any time the price of the asset does reach the target price it will instantly expire ‘out-of-the-money’.
A one touch instrument is where you predict whether the underlying assets value will reach a target value when the option expires. If it does reach the target value then you are ‘in-the-money’ otherwise you fall short and are ‘out-of-the-money’.
This term is an option on a Boundary/Range Instrument and refers to when the underlying asset expires outside the higher and lower limits of the target prices.
Out of The Money
This term refers to the point when a purchased option has no gain and the trader makes a loss on their investment. It then corresponds to the conditions where the underlying asset price is below the strike level for a Call or High option, and the conditions where the underlying asset price is above the strike level for a Put or Low option.
A put is the common term for traditional vanilla option that entitles the buyer of the option to sell the underlying asset at the expiry of the contract. In the binary option universe, call also often refers to Low binary options.
Refund or Return on Loss
The “return on loss” is a specific term used in the binary options trading business that designate the percentage of your initial investment that you can actually recover even if you traded in the wrong direction. These refunds can vary between 5% and 15%.
Return or Payout
This refers to the achievable return you can expect on your invested amount if your binary option expires In-The-Money. Returns can depend on option type and asset. The return value will be clearly stated before you purchase your option so you always know what you stand to gain or lose.
Stock or Equity stock
A stock refers to the stock of a specific company which are available to trade on the financial stock market. Examples of stock include: Apple Inc, Google Inc, Facebook, BP, Barclays and Vodafone.
Strike or Target
The strike price (often referred to as purchase or target price) refers to the price of the underlying asset at the time at which you purchase the option. When the option expires, the live price of the underlying asset at the time of expiry is compared to the strike price to determine whether your option has generated a profit (“in the money”) or a loss (“out of the money”).
Underlying Asset Types or Underlying Asset Classes
The type of asset refers to which financial category each asset falls into. The main asset types that are available to trade in are Equity stocks, Commodities, Indices and Currencies (also called forex). Examples of asset types and their assets are listed here:
- Equity Stocks: Google, Ford, Bank of America…
- Commodities: Gold, Silver, Crude Oil…
- Indices: FTSE-100, Nasdaq, S&P500…
- Currencies (or forex pairs): EURUSD, USDGBP…
After making successful investments it’s time to take your cash back out of your trading account, this comes in the form of a withdrawal. A withdrawal can take some time depending on the broker and also cost depending on which method you have chosen to withdraw your funds with.
Please find above a glossary of the most common terms used for binary options trading. We will try to update this glossary with any new widely spread term in the industry. Don’t hesitate to comment below if you want us to add or detail on of the below definition.